Unbiased Analysis of Today's Healthcare Issues

Fee for service vs. capitation: How financial incentives affect medical service provision

Written By: Jason Shafrin - Dec• 04•06

Today I will be briefly be reviewing four recent articles which examine how physician payment methods affect the amount of medical service provision.

GP reimbursement in Ireland

Madden, Nolan and Nolan (Health Econ 2005) use a quasi-experimental framework to see how changing physician compensation affects the number of doctors visits. In Ireland approximately 30% of the population receives free general practitioner services (“medical card services”) while the remainder (“private patients”) must pay for their medical services. In 1989, the Irish government changed the manner in which physicians were compensated for ‘medical card’ patients from FFS to capitation. The authors take this policy change to be exogenous as use the private patients as a baseline group to control for any time trends. The authors use the a pooled cross sectional framework with data points in 1987, 1995 and 2000, to preform a difference-in-difference estimation. Unfortunately the 1987 and the 1995/2000 data points come from two different surveys which could bias their results. Econometrically, the authors first model whether a patient will visit a doctor at all using a logit regression and then among those who visit a doctor, a negative binomial framework is used to estimate how financial compensation affects the number of doctor’s visits. The authors’ results show that the capitation payment method reduced the number of doctors visits for each patient.

Physician Reimbursement and Cataract Surgery

This study by Shrank, et al. (2005) looks at how surgery rates change when an eye care network of ophthalmologists and optometrists in St. Louis changed from a FFS compensation method to a capitation method. The managed care organization with whom the network maintained a large contract changed their compensation method from FFS to capitation between 1997 and 1998. The authors find that cataract surgery rates dropped significantly after the change, but non-cataract surgery rates did not change much. In the authors’ words “The finding that cataract surgery was more responsive to reimbursement methodology than other procedures supports the hypothesis that elective procedures are more responsive to physician incentives than nonelective procedures.”

Insurance Type and Orthopaedic Surgery Rates

This study by Brinker, et al. (2006) looks at clinical and financial data between 1999 and 2004 for a group practice of 40 orthopaedic surgeons. The authors examined surgery rates for different insurance types: capitation HMO, HMO, PPO, indemnity, self-pay, worker’s comp, Medicaid, and Medicare. The results show that there is little difference in surgery rates between the insurance types. One, however, may worry about selection problems: it is possible that those with capitation payments who ended up going to the orthopaedic surgeon would be sicker than those patients who went the surgeon and had a FFS insurance. Also, the authors’ estimation strategy conditions on diagnosis, but if insurance reimbursement is based on the diagnosis given by the physician, the diagnosis could be an endogenous variable. The authors also acknowledge that they have no knowledge of the severity of the illness, just the patient’s primary diagnosis. Nevertheless, this paper suggests that financial incentives may not be as important a factor in the case of specialist care as primary care.

Payment Procedures in HMOs and variation in Specialty Services

Saver and his colleagues look at three large HMOs in the Midwest and the West between 1996-1998 who compensate physicians via FFS, salary and capitation depending on the physician or practice group. To avoid problems of adverse selection, the authors look at compensation variation within each HMO to determine if/how payment mechanisms drive specialist procedure rates. The procedures examined included the specialties of Cardiology, Cardiothoracic surgery, Ear Nose & Throat (ENT), Gastroenterology, Ophthalmology, and Orthopedics. General results found that FFS had higher odds ratios than salaried and capitation compensation, but capitation and salaried compensation had similar odds ratios.



FFS vs. Cap 7 9 0
FFS vs. Sal 11 6 0
Cap vs. Sal 3 8 2

We can see that FFS never leads to fewer procedures being preformed (compared to capitation and salary) at least in any statistically significant way. One problem with the results is that compensation decisions by insurers are often based on geographic market considerations, so regional differences may be biasing some of the results.

  • Madden; Nolan; Nolan; (2005) “GP reimbursement and visiting behaviour in Ireland” Health Econ vol 14, pp. 1047-1060.
  • Shrank; Ettner; Slavin; Kaplan; (2005) “Effect of physician reimbursement methodology on the rate and cost of cataract surgery” Arch Ophthalmol, vol 123, pp. 1733-1738.
  • Brinker; O’Connor; Pierce; Spears (2006) “Payer type has little effect on operative rate and surgeons’ work intensity” Clinical Orthopaedics and Related Research, nbr. 451, pp. 257-262.

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